Download Individual Income Tax

Making It Relevant 20
Introduction
• Collecting taxes is one way the federal
government plays a role in the United
States economy. 
• In a recent year the national government
took in almost $1.5 trillion in revenues. 
• The two major sources of all this money
are taxing and borrowing.
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Taxes as a Source of Revenue
• Taxes are payments by individuals and
businesses to support the activities of
government. 
• Article I, Section 8, of the Constitution
gives Congress the power to levy and
collect taxes. 
• Today taxes are the chief way the federal
government raises money.
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Individual Income Tax
• The individual income tax is the federal
government’s biggest single source of
revenue. 
• About 44 cents of every dollar the
government collects comes from income
taxes. 
• The federal income tax is levied on a
person’s taxable income, or the total
income of an individual minus certain
deductions and personal exemptions.
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Individual Income Tax (cont.)
• People may elect to take deductions
for… 
– contributions made to charity. 
– state and local income taxes paid. 
– home mortgage interest. 
– other expenses. 
• The government also permits personal
exemptions that are based on the number
of people who are dependent on the wage
earner who pays the income tax.
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Individual Income Tax (cont.)
• A dependent is one who depends primarily
on another person for such things as food,
clothing, and shelter. 
• The income tax is a progressive tax, one
based on a taxpayer’s ability to pay. The
higher a person’s taxable income, the
higher the tax rate. 
• People with higher incomes, however, can
often take advantage of certain deductions
not as available to those in lower tax
brackets, making the tax system less
progressive.
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Individual Income Tax (cont.)
• The deadline for filing income tax returns
each year is April 15. 
• During the year employers withhold a
certain amount of money from the workers’
wages. 
• This withholding pays the anticipated
taxes ahead of the April 15 filing date. 
• Self-employed people–including business
owners, tradespeople, and professionals–
are expected to file estimates of their
income four times a year and make
payments with each estimate.
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Individual Income Tax (cont.)
• The Internal Revenue Service (IRS), a
bureau of the United States Treasury
Department, collects these taxes through
its regional centers. 
• The IRS audits, or checks more closely,
a small percentage of tax returns each
year. 
• The IRS also investigates many
suspected criminal violations of the tax
laws each year.
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Corporate Income Tax
• Corporations, as well as individuals, must
pay income taxes. 
• The federal government taxes all the
earned income of a corporation beyond its
expenses and deductions. 
• Corporate income taxes represent about
12 percent of federal government
revenues. 
• Nonprofit organizations such as colleges,
labor unions, and churches are exempt
from this tax.
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Social Insurance Taxes
• The federal government collects huge
sums of money each year to pay for Social
Security, Medicare, and unemployment
compensation programs. 
• The taxes collected to pay for these major
social programs are called social
insurance taxes. 
• Employees and employers share equally
in paying the tax for Social Security and
Medicare.
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Social Insurance Taxes (cont.)
• These taxes are regressive taxes
because people with lower incomes usually
pay a larger portion of their income for
these taxes than do people with higher
incomes.
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Excise Taxes
• Taxes on the manufacture, transportation,
sale, or consumption of goods and the
performance of services are called excise
taxes. 
• The government imposes excise taxes
on gasoline, oil, tires, cigars, cigarettes,
liquor, airline tickets, long-distance
telephone service, and many other
things.
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Excise Taxes (cont.)
• Some excise taxes are called luxury taxes
because they are levied on goods such as
cigarettes and liquor not considered to be
necessities. 
• Excise taxes contribute about $50 billion a
year to the federal government.
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Customs Duties
• Taxes levied on goods imported into the
United States are called customs duties,
tariffs, or import duties. 
• The federal government imposes customs
duties to raise revenue or to help protect
the nation’s industries, businesses, and
agriculture from foreign competition. 
• Many business, labor, and farm groups
support protective tariffs, or high customs
duties, because they raise the price of
foreign goods, making them less
competitive to American goods.
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Taxes and the Economy
• The federal government sometimes uses
taxes to influence economic decisions. 
• Groups affected by tax increases have
sometimes influenced Congress to pass
special exemptions in order to reduce the
taxes they have to pay. 
• The result is that the tax system contains
many special provisions designed to
benefit certain groups.
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Borrowing for Revenue
• In addition to collecting taxes, the federal
government borrows money. 
• In 1996, borrowing amounted to about
$146 billion, or about 10 cents for every
dollar the government raised.
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Bonds and Other Securities
• The government borrows by selling federal
securities–financial instruments that
include bonds, notes, and certificates. 
• Federal government securities are popular
with investors because they are safe and
interest may not be taxable.
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Bonds and Other Securities (cont.)
• The most popular bonds for small investors
are savings bonds. 
• In return for lending the government
money, investors earn interest on their
bonds.
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The National Debt
• When the government’s spending is
greater than its income, it goes into debt. 
• Government borrowing to fund annual
budget deficits over time creates the
national debt. 
• The size of the national debt effects the
federal budget and the economy.
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How does the income tax compare with
other sources of federal revenue in terms
of the amount collected?
It is the greatest single source of revenues.
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How does the federal government use tax
laws to affect economic decisions?
Example: Income tax deductions for home
mortgage interest are meant to encourage home
buying and thus help the construction industry.
Exemptions are used to encourage activities, such
as exploring for oil.
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End of Section 1
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Drawing Up the President’s
Budget (cont.)
• The law requires the president to propose
to Congress the budget for the entire
federal government each fiscal year. 
• This budget must be delivered within 15
days after Congress convenes each
January. 
• The actual day-to-day preparation of the
budget is the responsibility of the Office of
Management and Budget (OMB).
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Uncontrollables
• Despite having a key role in the budget
process, the president does not have
complete freedom in making budgetary
decisions. 
• About 70 percent of the federal budget
consists of what are called
uncontrollables–expenditures required by
law or resulting from previous budgetary
commitments. 
• A large portion of the uncontrollables are
called entitlements–benefits that Congress
has provided by law to individuals.
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Uncontrollables (cont.)
• Entitlements include: 
– Social Security 
– pensions for retired government employees 
– Medicare 
– Medicaid 
– veterans’ benefits
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Uncontrollables (cont.)
• Another largely uncontrollable item in the
budget is the interest that must be paid on
the national debt. 
• In fiscal 1996, interest on the national debt
amounted to more than 15 percent of the
federal government’s total expenses.
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Congressional Budget Action
• The president draws up budget proposals,
but only Congress has the power to raise
revenue and pass appropriations. 
• No money may be spent and no taxes may
be collected until Congress approves. 
• Congress may revise the president’s
budget proposals as it sees fit.
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Gramm-Rudman-Hollings Act
• In 1985 Congress enacted the Balanced
Budget and Emergency Deficit Control Act,
known as the Gramm-Rudman-Hollings
Act (GRH) after the senators who
designed it. 
• This law was aimed at forcing the president
and Congress to work together to reduce
budget deficits.
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How do the executive and legislative
branches work together to produce an
annual budget for the federal government?
The executive branch draws up a proposed
budget; Congress uses the president’s budget
in preparing a tax and spending program to
submit to the president.
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Why is it so difficult for the federal
government to reduce spending or raise
taxes in order to balance the budget?
Reducing spending is difficult because so much of
the budget goes for uncontrollables. Reducing
spending in other areas may be unpopular with the
public, as is raising taxes.
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What is the deadline for filing individual
income tax returns?
April 15 is the deadline for filing individual
income tax returns.
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What are three institutions that are
exempt from the federal income tax?
Any nonprofit organizations–such as churches,
colleges, and labor unions–are exempt from
federal income tax.
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What are three responsibilities of the
Internal Revenue Service?
The IRS collects taxes, checks tax returns,
and investigates suspected criminal tax law
violations.
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What are four types of taxes that the
federal government collects?
1. income taxes
2. excise taxes
3. customs duties
4. estate and gift taxes
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What executive agency is charged with
preparing the federal budget?
The Office of Management and Budget (OMB)
prepares the federal budget.
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Why are federal securities such as bonds
popular with investors?
They are safe, and interest on some is tax
exempt.
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What is the goal of the Gramm-RudmanHollings Act?
Its goal is to force the president and
Congress to work together to reduce
federal budget deficits.
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What factors make it difficult for Congress
to cut spending?
Much of the budget consists of uncontrollables
such as entitlements and interest on the
national debt; each special-interest group
wants the cuts in someone else’s area.
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Why would business or labor groups
support protective tariffs?
Protective tariffs raise the prices of foreign
goods, making them less competitive
compared to American goods on the
domestic market.
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Section Focus Transparency 20-1 (1 of 2)
1. excise taxes in 1940;
individual income
taxes in 1990
2. consistently
decreasing after 1950
3. Answers will vary but
may include that
Social Security was
fairly new in 1940 and
had few beneficiaries
receiving payments.
Section Focus Transparency 20-1 (2 of 2)
In the past few years, the federal government’s
annual expenses have exceeded $1 trillion. If you
were able to spend $1 million every day, you would
need nearly 3,000 years to spend $1 trillion.
A River of Red Ink
Before 1998 the last fiscal year the federal budget was
balanced was 1969, when it ran a small surplus. That
was during the last three months of the Lyndon Johnson
administration and the first nine months of the Richard
Nixon administration. The last president to pay off the
national debt was Andrew Jackson, who served from
1829 to 1837.
End of the Slide Show
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